Bitcoins Hyperdeflation

Hyperdeflation is billed as one of the crippling flaws in the bitcoin currency. For a single currency economy, hyperdeflation absolutely is crippling, but bitcions aren’t trading in a single currency economy and they are trading with and against inflating currencies.

Deflationary spirals are so damaging because of their affect on the host countries economy, not simply for the fact that deflation occurs. A deflationary spiral occurs when the value of currency affects the price of goods and the wages of workers. This doesn’t and can’t happen with bitcoins since the price of goods is set to mirror inflating currencies (ie. USD price) and wages are also paid in those inflating primary and government controlled currencies.

Another potential issue of hyperdeflation is that of hoarding, however with bitcoins being infinitely divisible, there will always be a liquid pool of currency that will continue to be available and traded for goods and services, or exchanged for inflating currencies.

In fact the deflating currency trading with inflating primary currencies situation, has and will continue to see people dumping their hoards of bitcoins and cashing out for “a dream life” sum of inflating currency. Everybody has that number in their head, which would allow them to retire and live comfortably forever. If I owned 40,000 bitcoins (which would have cost me only $2400 in 2010), I would be able to cash out now for $1mil and live a pretty comfortable life (financially), and you know what, I probably would.

The end game with a widely accepted deflating currency, which trades with inflating currencies, is a continuous and uncontrollable flow of wealth from the inflating currencies, into the deflating currency. The only possible end result is that bitcoins become the worlds primary economy, at which point hyperdeflation and deflationary spirals might just become a problem, and each bitcoin will be worth in excess of $6 million. If this ever comes to pass, all those techie geeks who took the time to understand bitcoins early on, will be multi-millionaires.